Wovon man nicht sprechen kann, darüber muß man schweigen.

I'm putting myself on the record (not that I haven't a dozen other times on this site):

there is no inflation, if there it is two, maybe three years out at the earliest. This is massive deflation before your eyes, not even including the outstanding credit card balances and other personal loans which will never get paid, especially when the jobs start evaporating. No money=no buying, no buying= companies cut back, companies cut back=job cuts...

Add to that the pressure for the government to come up with (emergency) healthcare and other public assistance and the situation becomes untenable.

Oh, and Al Qaeda. That's right, I said it.

There are two solutions, and in order for them to work you have to do them today.

1. Cut rates. Dollar is stronger, oil is down, we can take it. Worry about inflation later. Worry about the never-going-to-happen wage inflation later. This is better than bailouts, which will lead to inflation.

2. Cancel mark to market: there is no market. You have ancient Chinese vase woth millions, but because the economy's bad no one wants it right this second, so on ebay it's still only at $2. Is it really worth $2? Should the bank get to repossess it when you go under for $2? That's where we are now. You're calling them 20% when they could be 60%. (The government may actually make money on FNM and FRE if/when this passes.) The result is you might actually be worth something, but still evaporate.

Comments

Would another rate cut really do anything? Real rates are already near zero, and the "pushing on a string" camp has a good point. The dollar index is still quite low, and another rate cut would probably push it back to its mid-year lows, while doing little to encourage credit availability. Banks too scared to use money at 2% aren't going to be appreciably more relaxed at 1.5%.

I actually think things are going to be fine. The engines of our economy aren't fundamentally different than they were before this crisis, it's just the fuel for those engines that needs addressing. Once credit markets swing back towards normal, the economy is ready to take off again. Productivity is up, and technology gets better every day. Besides, the rest of the world seems to be lagging us in this downturn, so it seems reasonable that we'll emerge from it first, and thus attract more capital than struggling markets.

As for mark to market, that's a tough call. I don't think there's anything wrong with trying to accurately assess your assets, though this doesn't work well during a bubble. I think the bigger lesson learned is that of simple risk aversion - don't leverage investments at 30 times assets. It leaves no margin of error.

M2M for level 3 assets has always been tricky, but if you can't find a billionaire or museum to loan you $100k for your $1 million dollar vase...then it may in fact be worth $2.

After all, it has no intrinsic value.

As a HF investor, I've thought a lot about this since 2007 [and 2002] -- and the M2M brigade is 95% correct. Something is only worth, in monetary terms, what someone else is willing to pay for it. That day, if that's the day you need the money.